The Day Ahead: Bond Markets Toying With Our Emotions?

Yesterday

- Nothing happened; low volume, low movement

- Slightly higher in 10yr yields, but MBS held sideways

- Rate sheets continued to worsen

- No clear suggestion on momentum

Today

- Trend is negative until proven otherwise

- Will take more than one day to do that, but even one would be encouraging

- No significant data today, 10yr Auction in the afternoon

Strategy

What are we to make of yesterday?  Here we were, ready for more pain after the strong jobs report and nearly two full weeks of preceding pain.  But MBS ended the day right where they began.  Is this some kind of trap where we see prices hold their ground only to fall further just as we get our hopes up?  Maybe.

Believe it or not, yesterday's tepid, narrow, and infinitesimally weaker bond market session wasn't all the uncommon in terms of "day after NFP" reactions.  The Mondays (or in this case, Tuesdays) after NFP have a tendency to be fairly contained as trading strategies are recalculated.  Add to that the fact that a lot of movement tends to happen in the first few minutes following the data and that the ensuing weeks tend to be light on data, and an equivocal session becomes easier to forgive.

The conclusion is that yesterday's ground-holding is meaningless.  It happens when bond markets bounce or continue selling, so we can't draw any supportive conclusions from it yet.  In order to do so, we'd need increased positivity and increased volume.  10yr yields would ideally need to break below 2.74, give or take, and Fannie 3.5s would need to crest 100-26.  Neither are impossible, but as was the case yesterday, all we can do is watch and react.

Charts

100-26 technical level in Fannie 3.5s. 

That's the ledge from which we could more realistically consider holding ground vs the more compelling post-NFP weakness.